Both individual retirement accounts and 401(k) plans are designed to help people save for retirement.
A 401(k) is offered by your employer. You contribute a portion of your paycheck each pay period, and the amount you can contribute depends on your plan’s specific rules and IRS limits. For 2025, you can contribute up to $23,500 if you’re under 50 or $31,000 if you’re 50 or older.
An IRA — either traditional or Roth — is a retirement savings account you open on your own. It’s not employer sponsored. For 2025, you can contribute up to $7,000 if you’re under 50 or $8,000 if you’re 50 or older.
The money in these accounts grows through regular contributions and investment returns. As your balance increases, your earnings may grow faster too, thanks to compounding.
When you can withdraw — and what it costs
You can withdraw money from an IRA or a 401(k) at any time, but early withdrawals come with costly penalties.
With traditional IRAs and 401(k)s, you’ll pay a 10% penalty on withdrawals made before age 59 1/2, plus income tax on the amount withdrawn.
For example, if you withdraw $2,000 from your IRA at age 50, you’ll owe a $200 early withdrawal penalty and pay income tax on the full $2,000. (Note that penalties and taxes may vary based on specific circumstances.)
Roth IRAs follow different rules. Because Roth contributions are made with after-tax dollars, you can withdraw your original contributions at any time without penalty or taxes. However, if you withdraw earnings before age 59 1/2, you may owe both the 10% penalty and income tax.
The bottom line? It’s wise to wait until age 59 1/2 before taking money out of any retirement account.
Emergency exceptions
There are some exceptions to the early withdrawal penalties — some set by federal law and others determined by your specific retirement plan.
For example, federal law allows you to withdraw up to $5,000 without penalty from an IRA or 401(k) to cover expenses related to the birth or adoption of a child. You may also take one penalty-free withdrawal of up to $1,000 per year to cover emergency expenses, such as a serious illness or injury.
Separately, some 401(k) plans offer hardship withdrawals, but eligibility for these is determined by your employer. You’ll need to check with your plan administrator to find out what qualifies under your plan’s rules.
Keep in mind that these are general guidelines. Not only do rules change and exceptions exist, but there are sometimes exceptions to the exceptions. Before making any decisions about your retirement accounts, consult with a qualified financial adviser.
© 2025